2 on Council take a freshman look at biz taxes

Two freshman members of City Council are prepared to propose a radical change in the city's business taxes, reversing a 14-year course pursued by the last three mayors to reduce a tax on Philadelphia firms' gross receipts.

Council members Bill Green and Maria Quinones-Sanchez say the current tax structure - and the reform program favored for years by Mayor Nutter - penalizes city-based firms and lets national retailers get away with paying little or nothing.

"People really need to know who pays," Quinones-Sanchez said. She said she believes that many national firms selling consumer goods here dodge business taxes by understating the profits they make in Philadelphia.

The city's business-privilege tax has two components - a gross-receipts portion, which taxes firms on their sales, and a net-income portion, which taxes profits.

It's long been an axiom of city tax reformers that the gross-receipts tax is particularly harmful, since it whacks companies on their sales, even if they don't make a profit.

Since 1995, Council and the mayor have been making small reductions in the gross-receipts tax.

But Quinones-Sanchez and Green are considering a dramatic reversal of course: immediately eliminating the tax on profits and increasing the gross-receipts tax enough so that the city's tax revenues aren't reduced.

Green says that would have more impact than making gradual reductions of either tax over many years.

"We have to look at something completely transformative and radical," he said.

The Council members say they and their staffs have been poring over city tax data for the past year.

They say the profits tax is harmful because it taxes knowledge-based firms in Philadelphia, like law firms and software designers, on their worldwide profits, while national retailers can manipulate their accounting so that it appears their Philadelphia stores don't make a profit.

A higher gross-receipts tax would make more sense, Green and Quinones-Sanchez believe, since the big retailers wouldn't be able to hide their Philadelphia sales the way they do their profits.

Nutter said that he wants to look at their legislation but that he's always believed that the gross-receipts tax made no sense.

"It seems to me to be on the borderline of insanity where a business, if you make no money, owes the city money," Nutter said.

Green and Quinones-Sanchez note that Los Angeles has adopted a gross-receipts tax, and last year the Council pair told the Nutter-appointed tax-reform task force that Philadelphia should move in that direction.

The task force rejected the idea and endorsed continued cuts in the gross-receipts tax, but Paul Levy, task-force member and Center City District director, said he and others are willing to take a closer look at the Council plan.

"I have an open mind on this," Levy said. "The impacts of these taxes are complex, and they affect different kinds of firms in different ways."

Levy and Chamber of Commerce President Rob Wonderling said that when Green and Quinones-Sanchez draft legislation, they'll get chamber accountants to run scenarios on the new taxes with actual city firms to see their potential impact.

"Anybody who's in favor of reducing the tax burden is moving in the right direction," Levy said.

Levy also noted that the task force recommended some technical changes the city could make in the way firms' sales and profits are assessed that would ease the burden on city-based firms.

Food retailers have long resented the gross-receipts tax, since they're typically high-volume, low-profit operations.

Jeff Brown, who owns five Shop Rite stores in Philadelphia, said the Green/Quinones-Sanchez proposal would be a nightmare for him.

"It would be a big problem," Brown said. "Grocery stores here usually pay their employees decent wages and benefits, and when they're struggling in this weak economy, they still have to pay that gross-receipts tax on all their sales."

The proposal is likely to evoke similar worries from owners of corner groceries, who struggle to survive while paying taxes on their sales.

Green said he sympathized, but said that if the gross-receipts tax is increased, food retailers will just have to pass it on to their customers.

He and Quinones-Sanchez said they're still gathering information, but will likely introduce legislation early next year.

Both believe that they can get the nine votes they need to get it enacted.